Evidence-on-the-nature-and-sources-of-agglomeratio

EvidenceontheNatureandSourcesofAgglomerationEconomiesStuartS.RosenthalDepartmentofEconomicsandCenterforPolicyResearch,SyracuseUniversity,Syracuse,NY13244-1020,USAPhone:315-443-3809;Email:[e-mail]::[phone];Email:[e-mail]:~wstrange/PreparedfortheHandbookofUrbanAndRegionalEconomics,Volume4November4,2002Revised:August24,2003*WearegratefultoGillesDuranton,VernonHenderson,JacquesThisseandtheparticipantsofapresentationattheNorthAmericanRegionalScienceAssociationMeetingsinNovember,2002.Anyerrorsareoursalone.WearealsogratefulforthefinancialsupportoftheNationalInstituteofAging,theConnaughtFundattheUniversityofToronto,andtheSocialSciencesandHumanitiesResearchCouncilofCanada.AbstractThispaperconsiderstheempiricalliteratureonthenatureandsourcesofurbanincreasingreturns,alsoknownasagglomerationeconomies.Animportantaspectoftheseexternalitiesthathasnotbeenpreviouslyemphasizedisthattheeffectsofagglomerationextendoveratleastthreedifferentdimensions.Thesearetheindustrial,geographic,andtemporalscopeofeconomicagglomerationeconomies.Ineachcase,theliteraturesuggeststhatagglomerationeconomiesattenuatewithdistance.Recently,theliteraturehasalsobeguntoprovideevidenceonthemicrofoundationsofexternaleconomiesofscale.ThebestknownofthesesourcesarethoseattributedtoMarshall(1920):labormarketpooling,inputsharing,andknowledgespillovers.Evidencetodatesupportsthepresenceofallthreeoftheseforces.Inaddition,thereisalsoevidencethatnaturaladvantage,homemarketeffects,consumptionopportunities,andrent-seekingallcontributetoagglomeration.JELCodes:R0(Urban,Rural,andRegionalEconomics:General),O4(EconomicGrowthandAggregateProductivity),D2(ProductionandOrganizations),C1(EconometricandStatisticalMethods:General)Keywords:agglomerationeconomies,productivity,externaleconomies,microfoundations,urbangrowth1.IntroductionThedegreeofconcentrationofeconomicactivityisstriking.Roughly75%ofAmericansliveincitiesasdefinedbytheCensusDepartment,andyetcitiesoccupyonly2%ofthelandareaofthelower48states.Asimilarstorycouldbetoldforanyotherdevelopedcounty:laborandcapitalarebothheavilyconcentratedincities.Itisnotjustaggregateactivitythatisagglomerated.Individualindustriesareconcentratedtoo.Figure1,forinstance,presentsthedensityofemploymentinthefurnitureindustry(SIC).Mostofthecountryhasalmostnoemploymentintheindustry,asthemapshows.ThemapalsoshowsthatthecountiesthatdohaveemploymentarenotrandomlyscatteredacrosstheU.S.TheyaredisproportionatelylocatedinthewesternpartofNorthCarolinaandinothernearbylocations.Clearly,furnitureisanindustrythatmakesuseofparticularrawmaterials,especiallywood.ForestryisanimportantindustryinNorthCarolinaandelsewhereintheSoutheast,sothelocationissensiblebecauseoftheaccessitofferstorawmaterials.Buttherearealotofotherequallysensiblelocationselsewhereinthecounty,fromMainetoOregon.Clearly,somethingbeyondlocatingnearrawmaterialssourcesistakingplace.ThemacropatternofFigure1repeatsitselfinFigure2,amapofthelocationofsoftwareproducers(SIC7371-7373and7375)inthevicinityofSanFrancisco.Themapreportsboththelocationsofexistingestablishmentsandthelocationswherenewestablishmentsarecreated(births).Ascanreadilybeseen,bothareconcentrated.Inthiscase,thereisnomaterialinputthatisanalogoustotrees.Despitethis,activityishighlyconcentratedinwhatisknownastheSiliconValleynorthofSanJoseandinSanJoseitself.Again,somethingisgoingonthatisleadingtothiskindofgeographicconcentration.Thischapterwillsurveyempiricalworkontheforcesthatleadtoconcentration,bothofindustriesinclustersandofaggregateactivityincities.Theseforcesareknownvariouslyasagglomerationeconomiesorexternaleconomiesofscale.Insurveyingtheempiricalwork,thechapterwillbeconcernedwithtworelatedquestions:whatisthenatureandwhatarethesourcesoftheincreasingreturnsthatproduceagglomeration?Inconsideringthenatureofagglomerationeconomieswewillbeconcernedwithanumberofsmallerquestions.Aretheylocal,asseemstobethecaseinsoftware,ordotheyoperateataregionalscale,asseemstobethecaseforfurniture?Aretheyrestrictedtoindividualindustrieslikesoftwareandfurniture,oraretheireffectscomprehensive,extendingacrossallactivities?Whatisthedynamicnatureofagglomerationeconomies?Aretheeffectsofproximityfeltimmediatelyordoesagglomerationhaveitspositiveeffectonproductivityonlywithalag?Finally,aretheeffectsdependentsimplyontheamountofactivitythattakesplacesomewhere,oristhenatureoflocalinteractions2importanttotheprocessofagglomeration?Allofthesequestionsrelatetowhatwewilldefineasthescopeofagglomerationeconomies.TheempiricalanswerstothesequestionswillbediscussedtogetherinSection2.Thesecondbroadquestionconcernsthesourcesofagglomerationeconomies.Marshall(1920)suggeststhree.Thefirstoftheseisthesharingofinputswhoseproductioninvolvesinternalincreasingreturnstoscale.Thesecondislabormarketpooling,whereagglo